Unlocking Small Business Success: Navigating the $2T+ Stimulus Bill for a Favorable 2020 Tax Environment
The $2T+ stimulus bill presents a significant opportunity for small businesses to regain footing after this disaster and emerge to a very favorable tax environment for the remainder of 2020. At Cloud9, our team has been through the fine print and transposed the bill into a tailored model for your industry to help you strategize and navigate your business over the next 3-6 months.
Key Provisions for Individuals
The Stimulus Bill provides for payments to individuals of up to $1,200 per person ($2,400 for a married couple) with an additional $500 for each qualifying child. The payment is subject to a phase-out for individuals with adjusted gross income over $75,000 and married persons filing jointly with AGI above $150,000. The amount of the payment is reduced by $5 for each $100 in income above the applicable threshold.
For taxpayers who have already filed their 2019 tax returns, the IRS will use this information to calculate the payment amount. For those who have not yet filed their 2019 return, the IRS will use data from taxpayer 2018 returns to calculate the payment. The economic impact payment will be deposited directly into the same bank account used on the return. For taxpayers for whom the IRS does not have direct deposit information, Treasury plans to develop a web-based portal so that individuals can provide their bank information to the IRS online so that individuals can receive electronic payments. Otherwise, those individuals will receive checks in the mail.
Haven’t filed your 2019 taxes? That’s okay. But, if your information has changed since your last tax return, now would be an excellent time to file so the IRS has your most current information.
Penalty-free Early Access to Retirement Plan Funds
In order to generate access to cash for individuals, the bill liberalizes the retirement plan rules for 2020, dealing with premature distribution penalties, plan loans, and required minimum distributions (RMDs).
The 10% premature early withdrawal penalty is waived for distributions (“Coronavirus distributions”) of up to $100,000 from qualified retirement accounts and individual retirement accounts for coronavirus-related purposes. Additionally, the federal income tax on such distributions can be taken into gross income ratably over a three-year period beginning in 2020, at the recipient’s election.
The law also provides that these distributions can be contributed back to the plan within a three- year period without affecting that year’s contribution cap. Any amount repaid is treated as if it were rolled over, and thus, not included in gross income.
On such distributions can be taken into gross income ratably over a three-year period beginning in 2020, at the recipient’s election.
This presents a significant opportunity to be strategic, give us a call to discuss.
Employer Payment of Student Loans Education Assistance Program
IRC Sec 127(c) of the Code is amended to include as a nontaxable employer-provided educational assistance program any payment of principal or interest made before January 1, 2021 (whether paid to the employee or a lender).
The CARES Act amends section 127 to allow employer payments made before January 1, 2021, for student loans to be treated as educational assistance. An employer may provide educational assistance to employees on a tax-free basis up to a maximum exclusion amount of $5,250 annually. The provision is limited to payments made after the enactment of the CARES Act and before January 1, 2021.
This presents a significant opportunity for both individuals and small businesses to strategically plan for 2020. Give us a call to discuss how you can optimize this benefit.
Key Provisions for Businesses
An eligible employer is allowed a credit against applicable employment taxes for each calendar quarter equal to 50% of qualified wages for each employee for such calendar quarter.
The number of qualified wages for any employee taken into account by an employer for all calendar quarters is limited to $10,000.
The credit is limited to the employment taxes owed as reduced by other credits (including the Sick Leave and Family and Medical Leave credits under the Families First Coronavirus Response Act) for all employees of the eligible employer for such calendar quarter. If the employee retention credit exceeds this amount, the difference is an overpayment that can be refunded.
Employer and Self-Employer Individual Deferral of Payroll Taxes
The CARES Act provides for a delay in the required deposit of payroll taxes.
Payroll Taxes: An employer may delay the deposit of employment taxes under section 3111(a) (the employer portion of the Social Security payroll tax) or 3221(a) (the “Tier 1” RRTA tax).
SECA Taxes: A self-employed individual may delay the deposit of one-half of the individual’s self-employment tax liability.
The taxes for which the deposit may be deferred are the taxes incurred from the date of enactment through the end of 2020. Of the taxes to be deferred, 50 percent of the deferred taxes are required to be deposited by the end of 2021. The remaining 50 percent is required to be deposited by the end of 2022.
Net Operating Loss (NOL) Rules Are Relaxed
The bill temporarily repeals 80% taxable income limitation for NOLs utilized in taxable years beginning before January 1, 2021, and the current 80% limitation would be reinstated for taxable years beginning after December 31, 2020.
The bill also provides a five-year carryback period for NOLs incurred in taxable years beginning after December 31, 2017, and before January 1, 2021 (unless waived by the taxpayer). This carryback provision would allow taxpayers who have incurred losses in any of the past two years or will incur a loss this year, to obtain a refund of taxes paid in the five years preceding the year of the loss. Special rules apply to REITs and life insurance companies, and with respect to the interplay between NOL carrybacks and any liability, a taxpayer had under Section 965 of the Code (the 2017 transition tax relating to untaxed earnings of certain foreign corporations).
The five-year carryback provision temporarily addresses a criticism of the TCJA, namely that prohibiting NOL carrybacks deprives companies of a needed source of liquidity in down business cycles. Taxpayers would claim a refund under the carryback provision by filing an IRS Form 1045 (for individuals, estates, and trusts) or IRS Form 1139 (for corporations). The IRS generally will process the refund request within 90 days (or the last day of the month in which the tax return reflecting the NOL is due, including extensions, if later).
Limitation of Individuals' Use of Business Losses
Under the TCJA, non-corporate taxpayers’ net business losses were limited under IRC section 461(l) to $250,000 ($500,000 for a joint filer). The Stimulus Bill would permit the use of net business losses without limit for the 2018 tax year through 2020. If you were limited in the use of carryover used in 2018, this could produce a refund opportunity.
Also, capital gains from sales or exchanges of capital assets are only included in the calculation to the extent of the lesser of (1) the net capital gain attributable to a trade or business or (2) capital gain net income. These technical amendments are retroactive to taxable years beginning after December 31, 2017.
Bonus Depreciation Allowed on Qualified Improvement Property (QIP)
The Tax Cuts and Jobs Act intended to permit immediate write-off of costs related to Qualified Improvement Property. Due to a drafting error, this provision was not put into that legislation and caused QIP only to be eligible for depreciation over 39 years. The Stimulus Bill fixes this drafting error and specifically permits bonus depreciation to be taken on qualified costs retroactively. This allows amendment of 2018 and 2019 filed returns and provide a source of cash, particularly for those in the hospitality industry.